Angela Merkel worries about chips – here's why you should, too

German Chancellor Angela Merkel appealed for government aid to boost microchip production in Europe this week as the world order reshuffles around the costly high-tech sector.

“We will have to spend gigantic sums,” the German chancellor said. “Without state aid, the expansion of microchip production in Europe will not be possible.”

Factories to build chips can cost billions of dollars to establish.

The comments from Mrs Merkel highlight a growing understanding among nations, big and small, of the implications for a future run on chips that slot into almost every piece of electronics that we use every day.

"The beast has to be fed," Bharat Kapoor, a partner at US management consultant Kearney's, told The National. "Beyond nukes, if we look at the last seven decades, power was defined by oil and energy."

But now the focus is shifting to who holds the supply of high-tech components.

“Take the example of a ‘top 5’ economy, India. A few years ago it was predicted that her biggest import bill would be electronics – all powered by chips – which could have been up to 15 per cent of its GDP.  That is nearly an unsustainable situation. Countries that have an oligopoly on these technologies are putting themselves in very different leagues.”

He highlighted Korea, Taiwan, Japan and Ireland as nations that have distinguished themselves with semiconductor market share, while Europe and the US race to catch up.

Meanwhile, in China – the world’s biggest semiconductor maker – the aim is to become entirely self-sufficient in supplying its own massive market.

China’s semiconductor industry generated $27.2 billion in sales in the first quarter of 2021, an increase of 18.1 per cent from a year earlier.

In the US, the Biden administration is in the midst of a 100-day review of the semiconductor supply chain and Congress is mulling legislation aimed at reducing US dependence on foreign supply while incentivising domestic production of semiconductors through a $50 billion infrastructure plan, Reuters reported.

What are chips and semiconductors? 

A main building block of chips are semiconductors – a technically complex product to manufacture since they are tinier than the tip of a needle and getting smaller all the time.

A single chip can contain millions of semiconductors, which send information inside everything from the smartphone in your hand to modern cars, smartwatches, e-readers and kitchen appliances.

With a growing number of consumer goods going from analogue to tech-enabled, the demand for semiconductors is booming – and there is no alternative.

Demand is only expected to increase, Mr Kapoor said.

As robotics proliferate across manufacturing, retail and healthcare, homes become equipped with smart features and consumer goods become increasingly electronic, there is no alternative to the chip in the coming decades.

“Even the Covid vaccine had to rely upon chips to make it happen in record time to the tune of 5-times faster than average vaccine development,” Mr Kapoor said.

While nations jockey for position, experts are sounding alarm bells over the steep cost of the high-tech transition.

Kate Crawford, a Microsoft researcher and author of Atlas of AI, told an audience at the CogX conference in London last week that the semiconductor shortage may provide a much-needed wake-up call.

“Our relationship to our devices is that they are easily thrown away and acquired,” she said. “Because of the semiconductor crisis, the ability to buy a new car has been put back by 6 to 12 months due to the lack of core devices.”

She said this may be instructive to consumers and policymakers that “we are going to have to be much more careful about the compute that we use … we are already teetering on a cliff.”